An Historical Investigation
Chapter 17: Economics With or Without Equilibrium?
17. Economics With or Without Equilibrium? THE NEED FOR DISEQUILIBRIUM ANALYSIS I used the term ‘Economics without equilibrium’ for theories which do not a priori assume equilibrium and take the issue of explaining coordination failures seriously. It turns out that this label is really a misnomer. We have seen that even the harshest critics of equilibrium analysis fail to develop a theoretical alternative without applying some kind of equilibrium concept. Economics without equilibrium does not exist and neither should we worry about this. I have demonstrated that equilibrium methods generate many valuable insights both in theory and in applied analysis like equilibrium search theory of the labour market. Disequilibrium dynamics aims to explain how the economy functions over time and it is here that the equilibrium concept may play a useful role in controlling potentially disruptive forces. Providing this sense of order in a field of dynamic analysis is the main role which the equilibrium concept plays in the more radical schools of thought like Post Keynesian, Austrian and Evolutionary Economics, which consider combatting neoclassical analysis as a raison d’être. All this should not hide that there are limits to how far one may penetrate into the field of disequilibrium economics with the tools of equilibrium analysis. We have seen in Chapter 16 what it takes to develop a proper disequilibrium foundation for general equilibrium analysis. Sixty years of theory development has been insufficient to develop a satisfactory theoretical explanation of the highly intuitive notion that equilibrium is a...
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